This investigation describes the differentiation of the type I pneumocyte from undifferentiated pulmonary epithelium. Cells lining subpleural alveolar septa were photographed from serial sections with the electron microscope and a three dimensional representation of each cell was obtained by transferring the contours of the cell membranes from micrographs to transparent plastic sheets which were then spaced to scale and stacked. The results of this study indicate that: (1) the only reliable criterion for differentiating between type I and type II cells is the commencement of attenuation of the type I cell; (2) differentiation of the type I cell occurs via the formation of one or more cytoplasmic attenuations that eventually fuse peripherally, thereby surrounding the unattenuated cell soma; (3) with respect to individual cells, blood-air barriers tend to form in distal areas of the attenuating cytoplasm before proximal areas; (4) both type I and type II pneumocytes retain certain characteristics that reveal their common origin.